Brief Principles for a Resilient External Equity Manager Program

The majority of external managers including employed traders and analysts have most of their time spent towards the investment management process or at least they should. Choosing the right selection of investment managers is a challenging task for public investment officers. Some important principles include firms to have a strong alignment of interest.

Principals of the external manager firm should have some skin in the game.

This includes the firm and the employees investing alongside their clients. Employee ownership is a powerful concept that aligns interests in asset management firms. This potent attraction can motivate employees and strengthen personnel retention. This leads to the issue that the majority of asset managers are large with a menu of products or “solutions.” For larger organizations, one possibility to tackle this is to give those employees ownership of the product, a profit-sharing scheme.

Another major point to draw out is robust compliance. Having an operational framework that can lend institutional investors clarity on their risk exposures is priceless. Third, liquidity plays a paramount topic for investors. If one key investor leaves, how will it affect the fund?

Last, when selecting investment managers that plan on capturing alpha, investment officers need to analyze their investment strategy. Is it unique; is this really a beta strategy in disguise? Is this external manager generating excess risk-adjusted returns?

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